With the wealth of information available to the average cat today, it becomes increasingly difficult to determine where you should start in this business. In fact, the more you study, the more confused you can become. It has happened to me, and I'm sure it has happened to you. It's information overload, plain and simple.
On the flip side, this is a great business. The benefits of getting your feet planted squarely on the ground will allow you to live a lifestyle others only dream of. The trick is getting started on the right path. So, what is the right path? Well, in my opinion, you should learn how to generate cash first!
Real Estate Is Like a Three Legged Stool
There are three ways to profit from investing in real estate. You can use real estate to generate cash, cash flow, or equity (wealth building). Cash is money in your hand today; cash flow is money over time; and equity is the pot of gold at the end of the rainbow. It's future potential.
Which of these is the most valuable? It really depends on where you are with your investment program, doesn't it? If you are just starting out, there isn't any doubt in my mind that cash is the most important. Cash gives you options. You can improve your lifestyle, build your savings, accelerate your investment program, give to your favorite charity, go on vacations, and the list goes on and on. In fact, if you have been going after cash flow for a while, a shot of cash would probably feel good right about now!
The Mistake Most of Us Make
Truth be known, most of us make the same mistakes. When it comes to real estate investing, we buy a course and go out and start accumulating properties. We think we can garner a healthy cash flow while building equity for the future. We rock along until one day we wake up and realize we're always broke. Sure, if we can just make it to the end of the rainbow, we'll get our pot of gold. Or will we? What if something happens along the way? We go broke, or we stub our toe, or we die, or we go crazy (a very real possibility if it hasn't already happened!). A lot of things can happen along the way.
A Dirty Little Secret
The thing the gurus never tell you is that it's a hard row to hoe. Single family homes are a great investment vehicle…but they are a break even proposition at best. Sure you should buy with a positive cash flow. But how much is enough? Very few investors take into consideration all of the real expenses associated with real estate ownership. There's taxes, maintenance, insurance, management, vacancies, capital improvements, debt service, etc. Cash flow can be allusive. The property will always eat more than you expect.
What's the Answer?
Many people think the way to overcome this problem is by over-leveraging their properties. Buy it for $X, borrow $X+ and put the cash in your pocket; the property still has a positive cash flow, and you go on your merry way to do it again and again.
How much sense does that make? Debt is what causes people to go into bankruptcy. When your liabilities are greater than your assets, guess what? You are bankrupt! Broke! Wasted! The “nothing down” crowd has been preaching this investment strategy for years. But look at all of the bankruptcies they leave in there path. The funny thing is that once they get back on their feet, they make the same mistake again. They never figure it out.
Borrowed money is not profit. It's a liability, plain and simple. Don't be fooled into thinking otherwise. If you truly want to experience financial peace, work to eliminate debt in your life. Think about it for a moment. How good would it feel to be debt free? The answer is it feels real good!
Generate Cash First
Don't misunderstand me. The “buy and hold” strategy has it's place in your program. It's a great wealth-building program. But it's just not the place to start. You need to learn how to generate cash first! The easiest way to generate cash with real estate is through “buying and selling”. Plus, there are a whole bunch of other advantages you'll gain along the way that will help you accelerate your wealth building program.
There are two ways to accomplish our mission. One is the “buy low/sell high” strategy. Simply put, this is where you go out and buy a property below market and resell it at market prices. The old standby. One of these days, I'm going to have the t-shirts made that say: “When All Of The Other Investment Strategies Fail–Buy Low and Sell High!”
Buy wholesale, sell retail. It's been going on since the beginning of time. Rehab projects fall into this scenario, don't they? What a great way to produce a healthy cash profit while doing something worthwhile for your community. The other strategy that most people don't even know exists, is the “buy low/sell low” strategy.
This is where you find out what other investors (or rehabbers) in your marketplace want to buy, then you go out and get it for them. The profits on these deals are not as great as the retail strategies, but they can be done very fast! For this strategy to be successful, you have to know the market and the players. This isn't as hard as you might think. You also need to know how to locate the bargains and tie them up with a Contract to Purchase.
Once you have the property under contract, you can sell your contract to one of the players for cash, sell the property to another player at a simultaneous closing, or sell the property to a Joint Venture Partner for a small profit and stay in for a piece of the bigger profits. Once you learn how to structure your offers and contracts, you'll understand why I refer to this process as printing money, legally! These are the skills you need to develop to be successful. Learning these skills is fundamental to your real estate success.
Pulling It All Together
Learn how to generate cash first! This is a stand alone business all to itself. Then build your cash flow. A well selected property here. A well selected property there. Then concentrate on building wealth. This is a long term program. But remember, you have to stay financially fit to make it to the pot at the end of the rainbow. That's why learning to generate cash first is so important.